An International Monetary Fund (IMF) mission from Washington, D.C., headed by Olaf Unteroberdoerster, visited Cambodia from September 25 to October 5, 2012 to conduct the annual Article IV staff discussions.1 During the visit, the mission assessed macroeconomic developments and held policy discussions with ministers and senior officials of the Royal Government of Cambodia, and met a large group of stakeholders, including representatives of the academic and business community, NGOs, and development partners.

At the conclusion of the visit, Mr. Unteroberdoerster issued the following statement: “Resilient exports, robust tourism, and a strong real estate recovery continue to support Cambodia’s economy despite the global slowdown. During the first half of 2012, garment exports expanded by 14 percent (y/y) and tourist arrivals by 27 percent (y/y). Overall GDP growth is projected at about 6½ percent in 2012. Over the medium term, Cambodia’s growth rate could reach a potential of about 7½ percent, provided there is continued improvement in the business climate, infrastructure, and public service delivery. Inflation, after decelerating through mid-year, is projected to average about 3½ percent in 2012 and 4 percent in 2013.

The current account deficit (including official transfers) is projected to peak at 10 percent of GDP in 2012, in part due to moderating exports and strong investment-related imports, but remains fully financed through strong foreign direct investment (FDI) and official loans. Over the medium term, the current account deficit is projected to narrow to 5½ percent of GDP. Gross official reserves have continued their steady rise, growing by US$300 million during the first half of the year, and reaching US$3.3 billion in July 2012 (four months of imports).

Despite Cambodia’s favorable growth outlook and recent export performance, spillover risks from the still uncertain global recovery remain considerable. Potential downside risks in Cambodia could be a complicating factor, stemming mainly from potential labor market instabilities, extreme weather conditions, and rapid credit expansion affecting banks’ health. At over 30 percent, Cambodia’s rate of private sector credit growth so far this year is among the highest in Asia, fueled by easy domestic and global financial conditions and banks’ eagerness to lend. On the other hand, upside risks from improving power sector and rural infrastructure and increasingly diversified FDI amid positive spillovers from Asia’s rebalancing could provide a stronger-than-expected boost to Cambodia’s growth.

Against this background, discussions focused on the need to build greater policy buffers to cushion against adverse shocks in the near term and to reduce structural vulnerabilities and constraints to growth over the medium term.

On fiscal policy, revenue performance improved in 2012, with direct and indirect tax collections expected to rise by ¾ percentage points of GDP. The fiscal deficit is projected to narrow to around 3¼ percent of GDP, provided spending pressures are prudently managed. Going forward, rebuilding government deposits starting with the 2013 budget remains a top priority, enabling Cambodia to better absorb adverse shocks. From a longer term perspective, greater mobilization of fiscal revenues is imperative if Cambodia is to meet its vast development needs and maintain fiscal sustainability. The mission welcomed the government’s commitment to formulate a Revenue Mobilization Strategy. Simultaneous reforms in (i) enhancing revenue administration, (ii) designing fair and efficient tax policies, and (iii) promoting greater accountability and transparency are critical to make this strategy self-sustaining. The mission cautioned that, while greater revenue mobilization is key to increasing fiscal space, careful management of contingent liabilities in the context of recently adopted public debt management strategy is key to safeguarding it.

On monetary and financial sector policies, the mission welcomed the recent increase in the reserve requirement, a first step toward moderating credit growth. The plan to develop an interbank market, facilitated by securities that can serve as collateral, should improve banks’ liquidity management and help spur the move towards a more effective and market-based monetary policy framework. The recent launch of the credit bureau is improving risk management and credit allocation practices by banks and micro-finance intuitions. The mission welcomed the National Bank of Cambodia’s commitment to safeguarding the health of the banking system and agreed that the focus should be on continued strengthening of supervisory capacity, a more risk-based supervision, and strict enforcement of prudential regulations. Better coordinated surveillance among all relevant supervisory agencies is also critical to ensuring the stability of a rapidly evolving financial system.

To achieve a virtuous cycle of more self-sustaining and inclusive growth, creating policy buffers as outlined above should be complemented by structural reforms to support private sector investment and economic diversification. In this regard, the mission welcomed the government’s timely focus on infrastructure and skills development, and stressed the need for steadfast improvement in governance, delivery of priority social sector services, such as education and health, and the business environment.”

1 Under the Article IV consultation, IMF staff undertake annual surveillance and analysis of economic developments and policies of member countries for discussion by the Executive Board. The last Article IV consultation discussion with Cambodia took place in December 2011.